How do you read stock graphs?

A stock graph is a picture of every price a stock traded at over time. Once you know the five or six things on it, you can read any chart in seconds: a stock, gold, oil or a currency.

1. Start with the axes

Time runs along the bottom, from left (older) to right (now). Price runs up the right-hand side. So a line going up and to the right means the price rose over that time. Always check two things first:

• The time frame. One day, one month, five years? The same stock can be up on the day and down on the year.
• The price scale. A chart that starts at $100 rather than $0 makes small moves look huge. Read the numbers, not just the shape.

2. Line, bar or candlestick

• Line charts join up the closing price of each day (or minute, or week). Simple and good for the big picture.
• Candlestick charts show four prices for each period: where it opened, its high, its low, and where it closed. Most traders use them.
• Bar charts show the same four prices as candlesticks, drawn as a line with small ticks.

3. How to read a candlestick

The thick part is the body: from the open to the close. The thin lines, called wicks or shadows, reach to the highest and lowest prices of the period. A long wick means the price went there but got pushed back. A long body with short wicks means one side, buyers or sellers, was in control the whole time.

4. Volume: how much traded

The bars along the bottom show volume, how many shares changed hands in each period. Volume tells you how much conviction is behind a move. A big rise on heavy volume means a lot of buyers agree; the same rise on thin volume is easier to undo.

5. Trends, support and resistance

• Trend: higher highs and higher lows is an uptrend; lower highs and lower lows is a downtrend. Sideways means neither side is winning.
• Support is a price where the stock has stopped falling before, because buyers stepped in.
• Resistance is a price where it has stopped rising before, because sellers stepped in.
• A breakout is when the price pushes through one of these levels, often on heavy volume. Old resistance often becomes new support.

6. Moving averages

A moving average is the average closing price over the last so many periods, drawn as a smooth line. It filters out the noise. The 50-day and 200-day averages are the most watched: a price above its 200-day average is usually called a long-term uptrend, and when the 50-day crosses above the 200-day, traders call it a “golden cross”.

7. Ask what moved it

Every big candle has a reason: earnings, a data release, a headline. A chart shows what happened; the news tells you why, and whether it’s likely to last. That’s why LemonTrades puts the news right on its charts: each alert and big headline is a dot on the price, colored by what the market did next.

Common mistakes

• Judging a move without checking the time frame or the price scale.
• Reading percentages as dollars, or the other way around. A $5 move is big for a $20 stock and small for a $500 one.
• Seeing patterns in a few candles. Levels matter more when the price has reacted to them several times.
• Forgetting the market. If the whole market fell 3%, a stock down 3% didn’t do anything unusual.

Want to practice? Try reading the chart and placing trades with virtual money in our free trade simulator.